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Children’s Orchard Operations Manual
Children's Orchard, Inc.
Accounting
OPERATIONS MANUAL
ACCOUNTING
TABLE OF CONTENTS
Page
Introduction .........................................................................................................................1
Accounting Definitions........................................................................................................ 2
Setting Up ............................................................................................................................ 3
Recording QuickBooks Transactions.................................................................................. 5
Basic Accounting ............................................................................................................... 16
Double Entry Accounting...................................................................................................17
Multi-Unit Accounting ...................................................................................................... 18
Monthly and Annual Closing Procedures ......................................................................... 19
Depreciation ......................................................................................................................20
Budgeting Techniques........................................................................................................21
An Understanding of Cash Flow in a Children's Orchard Store....................................... 23
Internal Controls ............................................................................................................... 25
Taxes.................................................................................................................................. 27
Accounting Appendix A—Examples ................................................................................. 29
QuickBooks Chart of Accounts
Pro-Forma Balance Sheet
Profit and Loss Statement
Profit and Loss Statement (sample)
Daily Register Close Forms
Sales Journal and Weekly Report form
Sales Journal & Weekly Report form (sample)
Accounting Appendix B—Financial Statement Analysis .................................................. 39
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All information contained on this page is proprietary and confidential information of Children’s Orchard, Inc.
Accounting
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INTRODUCTION
Many first time owners find accounting for their store intimidating, time
consuming, and best left to a bookkeeper or accountant. However, owners are able to
keep an accurate picture of their finances and keep professional fees low by doing the
majority of their accounting themselves with the aid of accounting software.
We recommend you purchase QuickBooks Accounting software for your
accounting needs. This program is simple to learn and set up and is very user-friendly.
This section will give you a basic overview of accounting and accounting terms,
then provide specific instructions for daily and weekly tasks that can be easily completed
without professional assistance. You may decide that you are not comfortable with all
the accounting functions contained herein, and that you want your accountant to do
some or all of it. The purpose of these instructions is to make sure you do not spend
your hard earned money on services you may not need, so you can use it in other ways
that will better benefit your store.
Also included in this section is discussion of other items related to other
management and administrative functions of the company, such as internal controls,
petty cash management, budgeting and various taxes.
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Accounting
ACCOUNTING DEFINITIONS
Cash Flow
“Incoming cash less outgoing cash during a given period.”
In other words, the cash that actually flows into your business after all cash expenses,
including taxes, are paid for a particular period of time.
In addition to business expenses that consume cash other uses of cash in your
business may include:
¾ Increases in inventory
¾ Investment in fixtures and other assets
¾ Loan principle payments
Profit and Loss (also known as Income Statement)
“Financial statement that provides a historical perspective about a company’s
revenues, costs and profitability for a specific period of time.”
This statement shows all business income and expenses and therefore your profit
or loss for the period in question. All expenses, even non-cash expenses like
depreciation are included. Therefore, this is different than cash flow.
Balance Sheet
“A statement of financial condition at a given date.”
This statement shows all of the assets and liabilities of the business. As the name
suggests assets must balance (or equal) liabilities plus net worth.
Definitions for categories found on a Balance Sheet:
1. Short term (current) assets include: Cash, inventory, receivables
2. Long term assets are:
Fixed –Property (if owned), fixtures and equipment, sign
Intangible – customer mailing lists, brands, trademarks
Other – prepaid items, deposits
3. Short term (current) liabilities are: Accounts payable, short term debt (loans), taxes payable
4. Long term liabilities: Bank debt, lease obligations, stockholder loan to company
5. Net worth: Excess of assets and liabilities
6. Equity: Financing by means of shareholder or owner investment in a property or business.
7. Retained Earnings: Net profits kept accumulating in a business.
8. Depreciation: Decrease in the value of equipment from wear and tear and the passage of
time. (Tax deductible)
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Accounting
SETTING UP
If you haven’t already, apply for a Federal Employer ID Number (FEIN). Please
see the Pre-Opening section of this manual for more detail.
The next step is to choose your accounting system. If you are not planning on
doing your own accounting, you should meet with your accountant or bookkeeper as
early as possible, to ensure you are handling all day to day functions the way they
require. If you are planning on doing some or all of your own accounting, you should
install the accounting software you will be using and configure it for your business.
In QuickBooks, setting up a new “company” (i.e., your store) is very easy. When
you install the program, you will be able to use the “Easy Step Interview”, which will
walk you through the setup of your Chart of Accounts. It is also very easy to add
accounts later if you wish to see more detail on your financial statements.
CHART OF ACCOUNTS
A standard chart of accounts is the basis upon which a uniform accounting system is
developed. The chart of accounts is designed to provide the capability to accumulate
and report upon the financial results of your business. It also provides the following:
-
A consistent basis for the recording of accounting transactions from period
to period.
Compliance with generally accepted accounting principles.
The decimal numbering system readily permits adding additional accounts where
needed and may be applied, although it is not needed. QuickBooks allows you to set up
as many subaccounts beneath each main account as you need.
If you are in a situation where your accountant requires your Chart of Accounts to
be numbered, general accounting principles dictate the following numbering of each
category:
Assets
Liabilities
Equity & Capital
Revenues
Cost of Production
Selling Expenses
Administrative & Other Expenses
Royalties & Financial Expenses
Income Taxes
100.0 - 199.9
200.0 - 299.9
300.0 - 399.9
400.0 - 499.9
500.0 - 599.9
600.0 - 699.9
700.0 - 799.9
800.0 - 899.9
900.0 - 999.9
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In Appendix A, an example of a basic unnumbered chart of accounts is presented.
Each franchise owner should review the enclosed chart and, based upon its particular
needs, adopt at least these accounts. You or your accountant may find it necessary to
include more detail, or subaccounts. Owners who plan on doing the majority of their
own accounting should set up their chart of accounts and then have an accountant or
bookkeeper review it prior to use.
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RECORDING QUICKBOOKS TRANSACTIONS
Overview
This section provides basic instructions for creating the transactions in QuickBooks that
will allow you to accurately keep track of your capital on an ongoing basis. Regular entry of
these transactions is essential to the success of your business.
Daily
Weekly
Monthly
As Needed
Sales Journal Entry
Royalty Payment
COGS Estimate
Bank Deposit
Buy Journal Entry
Ad Fund Payment
Enter Bills
Buy Checks
Pay Bills
Daily Transactions
Daily journal entries should be made in QuickBooks to properly record your sales
and buys and to track your flow of cash. Because credit card transactions are deposited
to your bank account daily, entering information into QuickBooks on a daily basis will
greatly reduce the time you will spend reconciling your bank account statement.
Daily Sales Journal Entry
In QuickBooks, under Company, select Make General Journal Entries. Enter the date of
the sales you want to record. Tab to Account and fill in the fields as indicated below.
Daily Sales Journal Entry
Account
Debit
Credit
Memo
Cash:Buy Register
x.xx
A. Transfer to Buy Reg=Debit, from=Credit
Undeposited Checks
x.xx
B. Checks Rec’d (Debit)
Gen’l Checking
x.xx
C. V+MC (+=Debit, -=Credit)
Gen’l Checking
x.xx
D. Discover (+=Debit, -=Credit)
Store Credits
x.xx
E. Redeem=Debit, Load=Credit
Gen’l Checking
x.xx
F. Gift Card Sold
Sales:Resale Clothing
x.xx
G. Sale=Credit
Sales:New Clothing
x.xx
H. Sale=Credit
Sales:Resale Equip
x.xx
I. Sale=Credit
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Sales:New Equip
Sales:Reductions
x.xx
x.xx
Accounting
J. Sale=Credit
K. Discount=Debit
Sales Tax Payable
x.xx
L. Credit
Gift Card Liability
x.xx
M. Sale=Credit
Shortage/Overage
x.xx
N. Short=Debit, Over=Credit
Cash:Lock Box
x.xx
O. Cash to Lock Box (Debit)
When all rows have been completed, click Save & Close.
If sum of the debits does not equal the sum of the credits, you won’t be able to save the
transaction. If they don’t match, QuickBooks will add another row showing you how much
you’re off. Recheck your numbers. If you’re still off by an insignificant amount, add that
amount to the Shortage/Overage line.
NOTE: The first time you create this journal entry, under Edit select Memorize General
Journal, then enter a descriptive name such as “Daily Sales Journal Entry” and set up a
daily reminder. This will memorize all the account names you’ve entered and you will
only have to change the numbers from then on. To recall a memorized transaction,
under Lists, select Memorized Transactions List, then double-click on your entry.
Buy Journal Entry
The procedure for recording daily buy information is similar to that for recording sales.
Create a journal entry as follows, memorizing it the first time.
Daily Buy Journal Entry
Account
Debit
Credit
Memo
Cash:Buy Register
x.xx
A. Cash Buys (Credit)
Inventory
x.xx
B. Check Buys (Credit)
Store Credits
x.xx
C. Store Credit Buys (Credit)
Drop Offs
x.xx
D. Net Drop Offs (Rung=Credit,Paid=Debit)
Inventory:Resale Clothing
x.xx
E. Regular clothes (Debit)
Inventory:Resale Clothing
x.xx
F. Play clothes (Debit)
Inventory:Resale Equip
x.xx
G. Equipment (Debit)
Inventory:Add On
x.xx
H. Add On (Debit)
Non-Cash Promo:Store Credit Seller’s Bonus
x.xx
I. Bonus (Debit)
Shortage/Overage
x.xx
D. Short=Debit, Over=Credit
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Tips for finding errors: If your transaction does not balance, look first to see if the
amount you are off is anywhere in the transaction. Secondly, divide the amount you are
off by 2. If that number is in the transaction, chances are you recorded the amount in the
wrong column. Lastly, divide the amount you are off by 9. If the amount you are off by
is evenly divisable by 9 you may have transposed a number (i.e. 93.70 v.s $39
.70)
Buy Checks
Since checks written for buys will be individually cleared against your bank
account, you must record them individually in QuickBooks. Whether you issue and
print buy checks directly from QuickBooks or you hand-write them initially and record
them in QuickBooks later, use the following procedure:
Click the Check icon. The Write Checks window looks just like a standard check.
(See figure below.) Make sure the proper bank account is selected. If you’re
entering previously hand-written checks, enter the appropriate check number. If you’re
going to print the checks directly from QuickBooks, click the “To Be Printed” box. Enter
the check issue date.
If printing the check from QuickBooks, enter the seller’s name in the payee field.
If entering hand-written checks, the payee field is optional.
Enter the amount of the check, then tab over to “Account” and enter Inventory
with no subaccount. The sub-categorization has been handled in the Buy Journal Entry.
Click “Save & Close” to finish or “Save & New” to enter more checks.
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Accounting
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Weekly Transactions
As soon as possible after close of the fiscal week (no later than Monday morning)
you must complete the Sales Journal and Weekly Report Form. The Form will compute
your Royalty and Advertising fees that are due. You must send separate checks for these
two payments.
Royalty Payment
Click the Check icon. Make sure the proper bank account is selected and
the “To Be Printed” box is checked. Enter the check issue date, the payee as “Children’s
Orchard, Inc.”, and the Royalty Fee amount from the Weekly Report Form. Tab over to
“Account” and enter Royalties. Click “Print”.
Advertising Payment
The procedure is the same as for the Royalty Payment, but the payee is “CO Ad
Funds, Inc.”, the amount is the Advertising Fee from the Weekly Report and the
“Account” is Advertising:Franchise Ad Fee. Print the check.
It is a good idea to memorize your weekly Royalty and Advertising payment
transactions. That way, you get a reminder each week and you only have to change the
amount rather than fill out the whole check each time.
Mail the two checks along with the Weekly Report and Z-tapes to:
Children's Orchard, Inc.
Attn: Accounting
900 Victors Way, Suite 200
Ann Arbor, MI 48108
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QuickBooks Check-Writing Window
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Monthly Cost of Goods Sold Estimate
Since your Cost of Goods Sold (COGS) is not captured on a daily basis, it is
necessary to make monthly estimates in order to more accurately track your finances.
The Children’s Orchard system average Gross Profit Margin (GPM) is about 65%. We
can use this to calculate an estimate of COGS:
GPM = (Sales – COGS) / Sales
…or…
COGS = Sales x (1- GPM)
Using GPM = 0.65, we get
COGS = Sales x 0.35
So, for example, if your month’s sales were $25,000, your estimated COGS
would be 25,000 x .35 = $8,750. Therefore, you need to decrease your inventory and
increase your COGS by $8,750 at month-end.
To do this in QuickBooks, create a Journal Entry dated the last day of the
month that credits your inventory account and debits your COGS account by $8,750.
When you complete your semi-annual physical inventory, you will need to make
additional adjustments to these accounts to reflect your actual inventory. If your
physical inventory shows more inventory than your QuickBooks total, you will need to
make an entry to increase you QuickBooks total to match the physical inventory. You
will also need to reduce your C.O.G.S Account by the same amount. Should your
physical inventory show less inventory you will need to make an entry to reduce your
QuickBooks total to match the physical inventory. You will also need to increase your
COGS account by the same amount.
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As Needed Transactions
Bank Deposits
Ideally, cash and checks should be removed from the Lock Box and deposited to
your bank account every day. You may, however, choose to make deposits less
frequently if your bank is not nearby or if you do not want your staff making the
deposits. Whatever the deposit schedule, the procedure is the same.
In QuickBooks, under Banking select Make Deposit. Be sure the proper bank
account is in the “Deposit To” field and enter the deposit date.
Each check deposited will be entered on a separate line. For each check, enter
Lock Box under “From Account”, enter the check number and the check amount.
(“Received From”, “Memo”, “Pmt Meth”, and “Class” are optional fields and may be left
blank.)
After entering all the checks on separate lines, enter all the cash on one line.
“From Account” is Lock Box, “Pmt Meth” is Cash and “Amount” is the total of all the
cash.
Click “Print” to print a Deposit Slip and/or Deposit Summary for your records.
(See figure below.) Your bank will require that you fill out one of their pre-printed
deposit slips with the total amount, but will usually accept a copy of the QuickBooks
Deposit Summary for the detail. Keep copies of both for your records.
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QuickBooks Make Deposit Window
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Enter a Vendor Bill
When you receive a bill from a vendor, whether it’s from a utility company, an
inventory supplier, or a window washer, you should enter it into QuickBooks for
subsequent payment.
To enter a bill, under Vendors, select Enter Bills. Fill in the appropriate vendor
name, invoice date and due date. (See figure below.) If you have terms with the vendor,
enter Net 30, for example, and QuickBooks will compute the due date. Enter the invoice
number in the Ref. No. field. Under Account, select the appropriate expense or asset
account. You can divide the bill across different accounts by entering multiple lines.
QuickBooks Enter Bill Window
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Paying Bills
Rather than paying bills as they come due, it is more efficient to pay them in
batches, say once a week or once every two weeks. If the bills have been entered into
QuickBooks with proper due dates, it’s easy to keep track of which bills are due soon and
which can wait until the next batch.
Under Vendors, select Pay Bills. Choose the due date through which you would
like to pay, say two weeks from today if you’re paying biweekly. Or you can display all
the bills and just select the ones you want to pay now. Once you’ve selected the bills, be
sure the proper bank account and check date are selected. Click “Pay & Close”.
To print the checks you’ve just generated, under File select Print Forms and
choose Checks. You can then verify the starting check number, load the blank checks in
your printer, click OK, then click “Print”.
QuickBooks Bill Pay Window
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BASIC ACCOUNTING
The need to communicate financial information about a business enterprise
necessitated the creation of a record keeping system. The double-entry accounting
system, as described in this section of the manual, provides an automatic balancing of
financial records. Such a system was developed to provide for the orderly recording,
classification and summarization of significant accounting data. Double-entry
accounting is based on the following equation:
ASSETS = LIABILITIES + OWNER'S EQUITY
The left side of the equation represents the economic resources owned by the
enterprise; the right side shows who provided those resources. All assets owned by the
enterprise are provided by either outside creditors or by the owners.
The equality between the resources owned by the business and the claims against
those resources always remain constant. Any increase in the total economic resources
causes a corresponding increase in either the economic obligations, owner's equity or
both. Any decrease in the economic resources causes a corresponding decrease in either
the economic obligations, owner's equity or both.
When a sole proprietor decides to incorporate, the owner's equity category is
replaced with the category "Stockholders' Equity." The stockholders' equity section is
broken down into two sub-classifications—"Contributed Capital" and "Retained
Earnings." Contributed capital represents the shares of ownership in the company given
up in exchange for other economic resources. Typically, shares of ownership are
evidenced by shares of stock. Other economic resources, not received in exchange for
shares of ownership, are usually recorded in an account known as "Paid-In Capital."
The difference between the economic resources and the economic obligations for
an operating period is known as "earnings." These earnings, after dividend
distributions, are known as "retained earnings."
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DOUBLE-ENTRY ACCOUNTING
Since the equation must always be in balance, every accounting transaction must
be recorded in at least two places. These transactions can be recorded in one or more of
the five major categories of accounts. These are asset accounts, liability accounts,
revenue accounts, expense accounts, and equity accounts. Since the basic principle
underlying double-entry accounting is that every transaction affects two or more
accounts, the term "double entry" accounting is used.
The terms "debit" and "credit" are accounting language used to describe the left
and right sides of a transaction entry. Normally, asset accounts and expense accounts
have debit balances. Asset and expense accounts are increased by adding a debit
amount (i.e., the account would be "debited"). Revenue, liability, and equity accounts
are increased by adding a credit amount (i.e., the account would be "credited").
The following table is presented for reference purposes:
Type of Account
Assets (cash, receivables, inventory, prepaid
expenses, fixed assets and other assets)
Liabilities (accounts payable, accrued liabilities,
long-term liabilities)
Revenue (sales, interest, miscellaneous receipts)
Expenses (wages, supplies, cost of sales, taxes, etc.)
To Debit
To Credit
Increase
Decrease
Decrease
Increase
Decrease
Increase
Increase
Decrease
The basic point to remember is that asset and expense accounts usually have
debit balances and revenue, liability and equity accounts usually have credit balances.
To decrease an account, you merely reverse the designation. It is important that every
transaction has both a debit and a credit counterpart. The total of the debits in a
transaction MUST equal the total of the credits.
QuickBooks makes the double entry accounting system very easy. For instance, if
you are writing a check, you would fill in the amount of the check and what type of
expense the item is. The system will automatically list the expense in your profit and
loss statement and also fill in the other side of the entry, which in this case is cash (from
your bank account).
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MULTI-UNIT ACCOUNTING
Smaller single-unit operations will use all of the major categories of accounts.
However, these operations will typically have fewer categories of inventory accounts
active, and the costs recorded in those accounts will be readily identifiable through the
purchase prices. Assets, liabilities, sales expenses, and administrative costs will
continue to play an important role. Depending upon the nature of the operations, the
distinction between sales expense and administration costs may be difficult, in which
case, these categories would likely be combined.
All businesses involved in producing a product should place emphasis on the cost
of production, since this provides the "gross margin" available to cover sales expense,
administration costs, and owners' compensation. These costs (materials, direct labor,
and other direct costs) are typically more difficult to control and, therefore, should be
regularly reviewed and monitored to assure a satisfactory contribution to cover the
other costs. The comments in the cost account guidelines section are designed to
provide guidance in these areas.
If the business is involved with more than one location, it may be desirable to
establish separate "profit" or "cost" centers, or even separate divisions. This can be
established by expanding the account numbering system. Likely only one additional
digit would be required and this should be added to the right of the number (e.g.,
100.0X). In this manner, separate records can be maintained for offices, locations,
units, or functional activities. It may not be necessary for all categories of assets,
liabilities, revenue and expense to be handles in this manner - only those appropriate in
the circumstances. All revenues and expenses for these separate activities would be
recorded in the proper account categories. Any investment from the other activities
(working capital, capital expenditures, shared costs, etc.) would take place through a
series of intercompany accounts—titled "Due To" and "Due From." Likewise, any
repayments or contribution of earnings by the separate activities would be handled
through these same accounts.
When financial statements are prepared, the added account designations and
intercompany accounts will disappear through consolidation.
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MONTHLY AND ANNUAL CLOSING PROCEDURES
For each accounting period, normally monthly and annually, the general ledger is
used to prepare a trial balance of financial conditions (balance sheet) and profitability
(income statement). QuickBooks features "perpetual" closing, meaning you can select
whatever dates you want to view and you will see accurate information. Some
businesses, particularly the larger multi-unit operations, can elect a four-week
accounting cycle, instead of the typical monthly period. It appears that the four-week
cycle has the advantages of providing a more uniform pattern, especially when
comparing the financial statement between years, as it is often difficult to remember if a
given month had four or five weeks. On the other hand, the monthly cycle conforms
more to the reporting cycle of governmental reports and to other users of the financial
statement. The large majority of small and medium size businesses generally use the
monthly cycle.
Your accountant or bookkeeper should provide you with month or year-end
closing entries so that your system matches the financials prepared by the accountant.
If you have been doing all the entries described above to enter your income and
expenses, there should be very few entries (recording depreciation (see below), the
inventory/COGS adjustment, and any accrued amounts, such as payroll for one year
that was paid in the next year).
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DEPRECIATION
Your accountant will advise you on how to record depreciation. All fixed assets
(except land) acquired for use in the business enterprise are depreciable. Typically,
fixed assets include building, leasehold improvements, furniture and fixtures,
automobiles and trucks and equipment. Depreciation for financial statement and
income tax purposes is intended to represent the periodic decrease in value of the fixed
asset through its use. The basis for depreciation is the asset's cost and its useful life.
Once these factors have been determined, there are several methods of computing
depreciation (e.g., straight-line and various accelerated methods), and there is often a
first year "premium" through the investment tax credit provisions of the tax law.
Typically, costs for these fixed assets include the following:
¾ Buildings - Total cost of buildings and improvements acquired and
improvements added. Cost includes purchase price, architect fees,
permits, commissions, rehabilitation costs, etc.
¾ Leasehold Improvements - Total costs for improvements to facilities
leased or rented. Cost includes such items as carpets, drapes,
structural alterations, additions, etc.
¾ Furniture and fixtures - Total costs of acquiring movable furniture and
fixtures. For practicality, a minimum cost value is normally
established before these items are capitalized. Anything below this
value is expensed on a current basis.
¾ Equipment - Total costs of acquiring and installing equipment. Any major
improvements or modifications that increase the equipment's useful
life should increase the depreciation basis. Small or recurring
maintenance items should be expensed on a current basis.
¾ Automobiles and Trucks - Total cost of acquiring transportation
equipment. Any major improvements or modifications that increase
the equipment's useful life should increase the depreciation basis.
Small or recurring maintenance items should be expensed on a current
basis.
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BUDGETING TECHNIQUES
The uniform accounting system presented in this section provides the
opportunity to monitor and control the activities of the business. However, monitoring
and controlling presupposes that a baseline for measurement is in place, from which to
compare actual financial results. One way to do this is to relate operating costs and
revenues to production, and evaluate the output in relation to its financial results. This,
in fact, should be done by each and every manager. However, the results of this analysis
only provide past performance. The results should then be used to establish future goals
and objectives in terms of costs, production, collections, etc.
Typically, this function is performed through budgeting - a very valuable
management tool. If a budget is established, another measure of past performance is
available to combine with the production/costs analysis. A budget may be regarded as a
forecast of expected future events expressed in quantitative terms - usually an income
statement and balance sheet.
Budgeting provides an important management tool:
¾ To plan the investment in inventory.
¾ To avoid overproduction which may result in excessive goods.
¾ To avoid underproduction which may result in loss of sales or customer
dissatisfaction.
¾ To provide adequate cash balances for operating purposes.
Cash management and budgeting are, however, normally a part of the accounting
system. Budgeting of cash should be regularly done to avoid periods of low cash
availability which could adversely affect the business operations. The predictability of
cash balances becomes increasingly difficult as inventories fluctuate substantially,
capital expenditure programs become active and credit sales increase. However, cash
forecasting can and should be performed. It is accomplished by performing the analysis
that follows. Expected sales volume is the starting point. From this, we add or subtract
the difference in inventory levels, accounts receivable and payables (i.e., the difference
between their beginning and ending balances). Next, all expenses for the period must
be subtracted. Finally, all nonrecurring capital expenses, and dividend and
extraordinary earnings distributions for the period must be subtracted. If this analysis
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results in an expected cash balance which is unreasonably high or low, the manager
should take steps to amend the operating plans and strategies. The figure on the
following page is presented to provide a basic format for accomplishing the case
budgeting function.
QuickBooks allows you to enter your budget for some or all of your income and
expense accounts. To enter your budget, select Set Up Budgets from the Company
menu. Then select any categories you wish to enter a budget for and fill in the amount
for each month. Once this information is saved, you can run reports for any time period
to compare your budget to your actual numbers (from the Reports menu). Having this
information available to you on an instantaneous basis will allow you to keep current
with your business and make adjustments quickly.
In conclusion, budgets are a meaningful management tool. However, the
following elements need to be present in order for its usefulness to achieve its full
potential:
1. The budget must be realistic and achievable.
2. The budget should correspond to the company's fiscal year to facilitate
comparison with actual results.
3. Financial statements should be compared with the budgets on a timely basis.
4. Significant variations from the budget should be investigated on a timely basis by
the appropriate management person responsible for developing corrective action.
Your Franchise Advisor will help you budget for your business!
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Page 22
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Accounting
AN UNDERSTANDING OF CASH FLOW
IN A CHILDREN’S ORCHARD STORE
Not a complex thing for accountants to report – cash flow analysis is, instead, a
simple tool for you that may save your business, or at least lessen your stress.
SOURCES OF CASH
•
•
•
•
Selling anything, products, assets or ? Since we do not have accounts receivable
of any magnitude, selling is getting cash.
Investment of new cash into the business.
Borrowing cash in slack times to repay in better months, or borrowing to buy
assets.
Delaying payment is not a source of cash, but it is a way to delay using cash to
a better time. (Does not work with landlords, the IRS, the franchise or utilities.
Might work with vendors up to a point.)
USES OF CASH
• All business expenses
• All asset purchases
• Money taken out by owners
NOW WHAT?
•
•
•
Use your Quickbooks budget features. Sit down at least twice per year with
QB and your Profit and Loss Statements for each month in the past 12 months.
Spend a whole day if needed deciding just what income from sales you are likely
to have each month and what expenses will occur based on seasonal patterns,
trends, past history. Always budget at least six months in advance; one year is
better, two years is best, three years exceeds reason.
Do not bother to budget depreciation and other non-cash items. That
way, since this is mostly an instant cash business, your budget IS a cash flow
forecast. Do budget any amount you MUST take out of the business as if it
were an expense. Call it your salary, even though it might be distributions not
payroll if you have, for example, a Sub S corporation.
Look at each month’s profit or loss. Deduct debt principal payments. (You
already covered debt interest in the budget, as a business expense.) Now you
want to decide:
1. Months with net cash generated. Can you take that home? Do you
want to prepay on a loan or pay off a line of credit draw? Or, does a future
month need that cash? Should you set it aside?
2. Months with cash needs. Did you set some money aside from a better
month? Did you develop a working capital line of credit with a bank so,
instead of setting aside from better months, you draw on this loan, then
pay it back in a better time?
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Accounting
Can you do anything to add sales for those negative months, without adding more
costs than sales? Can you do anything to defer or eliminate costs? Is it time to fight for
a better lease rate, to remove some light bulbs from the back room, to replace an
employee with one paid less, to lower or raise the room temperature to save on utilities
usage, or to work more yourself so you need fewer employees?
•
That’s it! It takes planning, guts and effort to do something about cash flow
issues, and business people who succeed bring all three to the table.
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Accounting
INTERNAL CONTROLS
Internal control encompasses both accounting and administrative controls.
Administrative controls apply to all activities that have no direct bearing on the financial
records, such as a plan of organization and company operating procedures as described
in other sections of these manuals.
Accounting controls, on the other hand, pertain directly to the safeguarding of
assets and the recording of the financial records in an accurate and timely manner.
For smaller enterprises operated by the owner, the functions necessary to
safeguard assets are generally performed as one part of total management
responsibilities. As an enterprise becomes larger and employees are added in
responsible positions, the internal controls must be better defined in order to maintain
their effectiveness. A system of accounting controls should be implemented to do the
following:
1.
2.
3.
Assign accountability for the safekeeping of assets;
Provide a system of recording accounting transactions in the proper
period; and
Segregate the accounting function from those responsible for the
custodianship of the assets themselves.
Also, no individual except the owner should be allowed to handle cash from
receipt to disbursement. When the owner is unavailable, two or more people should be
involved in a transaction, each serving as a check against the other's work, thereby
decreasing the likelihood of misappropriations.
Internal control is the responsibility of management. As the business grows and
diversifies, the number and complexity of transactions also increase. An effective
system of internal control must be maintained to ensure reliable and timely financial
data.
The system of internal control will vary depending on the size of the organization,
but, regardless of size, an effective system of control should do the following:
1.
Assign responsibility and specific duties to separate individuals. This
makes each individual accountable for the performance of a particular
task.
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Page 25
Children’s Orchard Operations Manual
2.
3.
4.
5.
6.
7.
Accounting
Not allow an employee to have access to both the physical asset itself and
the financial records pertaining to it. For example, the employee who
operates the cash register should not have access to the sales and cash
receipts journal. Performing both of these functions might facilitate
misappropriation of cash without the knowledge of the company.
Require rotation of job assignments where possible. Rotation of job
assignments reduces the likelihood of fraud and increases the probability
of detection if it does occur.
Make uninterrupted vacations for key employees mandatory.
Require the bonding of employees in positions of extreme trust.
Provide for company policies and procedures in writing. As defined, this
section can, if utilized correctly, help reduce the chances for
misunderstanding.
Provide for adequate training and supervision of all employees. Proper
supervision results in increased productivity and maximum utilization of
time and resources.
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Accounting
TAXES
Every business owner and employer is responsible for collecting the applicable
state and federal taxes and remitting them to the proper agencies at the required time
If you use a payroll service, they will take care of the calculation and depositing of
payroll taxes. However, the liability ultimately lies with the business owner.
If you do your own payroll using Quickbooks, subscribe to their automatic tax
table update service. You will be reminded when to download new tax tables.
Withholding Tax
These are the wages that you as an employer will be required to withhold from
the ongoing wages of each employee.
The amount withheld is determined by the number of exemptions claimed by the
employee on the W-4 form (withholding exemption certificate), the employee's marital
status, and the lengths of the payroll period.
Social Security and Medicare Taxes (FICA)
The FICA, or Federal Insurance Contributions Act, requires an employer to
match the amount of Social Security and Medicare taxes each employee pays. The three
reports required by the IRS concerning payroll taxes are:
1.
2.
3.
Quarterly return of withholding tax (Form 941)
Annual withholding statement (W-2 Form)
Reconciliation of quarterly withholding with annual withholding taxes (W3 Form)
State Payroll Taxes
Most states levy payroll taxes. In addition, most states require an unemployment
tax to be paid by the employer. This tax is a percentage of the employer's payroll and is
paid annually. State requirements and tax-collecting systems vary. You should call your
state government offices and apply for an employer number, the appropriate forms, and
information.
Personal Income Tax
If you are operating as a sole proprietor or as a partner, you will not receive a
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Children’s Orchard Operations Manual
Accounting
salary as your employees do. There will be no income tax withheld from the money you
take out of your business. To meet your tax obligations, you must estimate your tax
liability and file quarterly installments. Your IRS office will supply you with a tax guide
for small businesses and the applicable forms. Your year-end tax return is filed as an
individual return and your tax liability is computed from profits earned in that year.
Sales Tax
Sales tax regulations vary widely from state to state. You should contact your
state or local IRS office for the regulations that apply to your business in your state. If
you are required to collect tax on some items and not others (for example, equipment
and not clothing), you will need to set up a system of record keeping that reflects those
requirements. In many areas you are not required to collect taxes on sales to certain
nonprofit institutions; for example, schools, churches, etc. Such institutions should be
able to provide you with their tax-exempt number.
Sales tax is usually required to be rendered monthly. Your monthly report
package is set up to provide you with a monthly total for sales tax due. Use these
records to comply with applicable regulations.
In QuickBooks, each day when you enter your daily deposit, you are recording the Sales
Tax you collect and placing it in a Sales Tax Liability account. When you write a check
to pay your sales tax for a give period, below the check in the Expense tab, the account
you pay your tax from will be the same Sales Tax Liability account (i.e. when you record
your deposits, you are putting in an amount you owe your state, thereby increasing your
liability; when you record the check, you are giving them the money you collected (i.e.
you are showing a decrease in the liability, since you are paying them).
Consult your accountant regarding tax matters. It is essential that your tax
collecting methods be correctly set up and that appropriate tax be submitted accurately
and on time. Unless you are prepared to spend countless days in research or you are
already a tax scholar, professional advice is recommended in gathering the information
appropriate to your tax needs.
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Page 28
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Accounting
ACCOUNTING APPENDIX A
EXAMPLES
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Children’s Orchard Operations Manual
Accounting
CHART OF ACCOUNTS
Account
Buy Checking
Gen'l Checking
Savings
Cash
Cash:Front Register
Cash:Buy Register
Cash:Lock Box
Cash:Petty Cash
Undeposited Checks
Inventory
Inventory:Resale Clothing
Inventory:New Clothing
Inventory:Resale Equip
Inventory:New Equip
Inventory:Add On
Furniture, Equipment
Accum. Depr: Furniture, Equipment
Leasehold Assets
Accum. Depr.: Leasehold Assets
Franchise Fee
Accum Amort.: Franchise Fee
Intangible Assets
Accum. Amort: Intangible Assets
Deferred Assets
Payables
Sales Tax Payable
Drop Offs
Payroll Liabilities
Payroll Liabilities:Fed Withhold
Payroll Liabilities:FICA
Payroll Liabilities:FUTA
Payroll Liabilities:State Withhold
Payroll Liabilities:State Unemp
Gift Card Liability
Store Credits
RA, Paid Out
Note Payable
Open Bal Equity
Retained Earnings
Sales
Sales:Resale Clothing
Sales:New Clothing
Sales:Resale Equip
Sales:New Equip
Sales:Reductions
Sales:Gift Card Sales
Cost of Goods Sold
Cost of Goods Sold:Resale Clothing
Cost of Goods Sold:New Clothing
Cost of Goods Sold:Resale Equip
Cost of Goods Sold:New Equip
Amortization
Type
Bank
Bank
Bank
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Other Current Asset
Fixed Asset
Fixed Asset
Fixed Asset
Fixed Asset
Other Asset
Other Asset
Other Assets
Other Assets
Fixed Asset
Accounts Payable
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Other Current Liability
Long Term Liability
Equity
Equity
Income
Income
Income
Income
Income
Income
Income
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods Sold
Expense
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Children’s Orchard Operations Manual
Bad Debt
Bank Charges
Bank Charges:CC Settlement
Bank Charges:Service charges
Contract Labor
Donation
Franchise Fees
Franchise Fees:Royalty
Franchise Fees:Ad Fund
Insurance
Insurance:Workers Comp
Insurance:Business Owners
Janitorial
Legal and Accounting
Marketing
Marketing:Ads
Marketing:In store
Non-Cash Promo
Non-Cash Promo:Store Credit Seller's Bonus
Non-Cash Promo:Cache Card Promo
Payroll Expenses
Payroll Expenses:Staff Wages
Payroll Expenses:Owner
Payroll Expenses:Manager
Payroll Expenses:Bonus
Payroll Expenses:Benefits
Payroll Expenses:FICA
Payroll Expenses:FUTA
Payroll Expenses:State Unemp
Rent
Repairs, Maintenance
Rubbish Removal
Shortage/Overage
Storage
Supplies
Supplies:Office/Back Room
Supplies:Sales Floor
Taxes - Nonpayroll
Taxes - Nonpayroll:Federal
Taxes - Nonpayroll:State
Telephone
Travel & Entertainment
Utilities
Other Income
Interest Income
Other Expense
Interest Expense
Accounting
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Expense
Other Income
Other Income
Other Expense
Other Expense
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Page 31
Children’s Orchard Operations Manual
4:57 PM
Training Sample Sheet
12/28/2005
Balance Sheet
As Dec. 31 2005
Accounting
Accrual Balance
Dec 31, 05
ASSETS
Current Assets
Checking/Savings
Buy Checking
General Checking
Savings
Total Checking/Savings
6,943.00
16,985.00
1,256.00
25,184.00
Other Current Assets
Cash
Sales Register
125.00
Buy Register
225.00
Lock Box
Petty Cash
430.00
95.00
Total Cash
875.00
Inventory
Resale Clothing
24,315.00
New Clothing
2,984.00
Resale Equipment
New Equipment
2,595.00
1,688.00
Total Inventory
31,582.00
Total Other Current Assets
32,457.00
Total Current Assets
57,641.00
Fixed Assets
Furniture, Fixtures and Equipment
Accum. Depr - F, F & E
Leasehold Improvements
Accum. Depr - Leasehold Improv.
Total Fixed Assets
29,695.00
-11,878.00
7,745.00
-3,098.00
22,464.00
Other Assets
Franchise Fee
Accum. Amort. Franchise Fee
Rent Deposit
Total Other Assets
TOTAL ASSETS
22,500.00
-4,500.00
2,875.00
20,875.00
100,980.00
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Page 32
Children’s Orchard Operations Manual
4:57 PM
Training Sample Sheet
12/28/2005
Balance Sheet
As Dec. 31 2005
Accounting
Accrual Balance
LIABILITIES & EQUITY
Dec 31, 05
Liabilities
Current Liabilities
Accounts Payable
Accounts Payable
7,052.00
Other Current Liabilities
Drop Offs
69.00
Sales Tax Due
1,265.00
Gift Card Liability
Store Credits
6,258.00
9,312.00
Total Other Current Liabilities
16,904.00
Payroll Liabilities
Federal Withholding
FICA
665.00
1,824.00
FUTA
151.00
State Withholding
State Unemployment
366.00
87.00
Total Payroll Liabilities
3,093.00
Total Current Liabilities
27,049.00
Long Term Liabilities
Note Payable - Bank
Note Payable - Owner
Total Long Term Liabilities
Total Liabilities
44,628.00
6,054.00
50,682.00
77,731.00
Equity
Retained Earnings
Open Bal Equity
Net Income
Total Equity
TOTAL LIABILITIES & EQUITY
6,542.00
10,050.00
6,657.00
23,249.00
100,980.00
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Page 33
Children’s Orchard Operations Manual
3:32 PM
Training Sample Sheet
12/28/2005
Profit & Lost
January through December 2005
Accrual Basis
Accounting
Jan - Dec 05
Ordinary Income/Expense
Income
Sales
Resale Clothing
197,472.00
New Clothing
24,480.00
Resale Equip
26,928.00
New Equip
Reductions
Sales - Gift Cards
Total Sales
Total Income
Cost of Goods Sold
Total COGS
6,150.00
-2,380.00
300.00
252,950.00
252,950.00
89,797.00
89,797.00
163,153.00
Gross Profit
Expense
Amortization
Bad Debt Expense
2,250.00
38.00
Bank Charges:
CC Settlement
Service Charges
Contract Labor
Depreciation
Donations
2,650.00
150.00
300.00
3,140.00
300.00
Franchise Fees:
Royalty
12,648.00
Ad Fund
2,530.00
Insurance
Worker's Comp
Business Owners
275.00
1,150.00
Janitorial
Marketing
Ads
9,675.00
In-Store
1,800.00
Non-Cash Promo
St Cr Seller's Bonus
8,211.00
Cache Card Promo
4,850.00
Payroll Expenses
Staff Wages
Manager Wages
Owner Wages
37,128.00
0.00
15,500.00
Benefits
2,500.00
FICA
4,290.00
FUTA
State Unemployment
Rent
425.00
318.00
34,500.00
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Page 34
Children’s Orchard Operations Manual
3:32 PM
Training Sample Sheet
12/28/2005
Profit & Lost
January through December 2005
Accrual Basis
Accounting
Jan - Dec 05
Repair and Maintiance
375.00
Rubbish
600.00
Shortage/Overage
Storage
19.00
1,200.00
Supplies:
Office / Back Room
2,550.00
Sales Floor
2,685.00
Taxes Non-Payroll
Telephone
Travel and Entertainment
Utilities
Total Expense
Net Ordinary Income
Other Income
Other Expenses
Net Income
225.00
1,750.00
865.00
2,150.00
154,797.00
8,356.00
29.00
1,728.00
6,657.00
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All information contained on this page is proprietary and confidential information of Children’s Orchard, Inc.
Accounting
Page 36
Children’s Orchard Operations Manual
All information contained on this page is proprietary and confidential information of Children’s Orchard, Inc.
Accounting
Page 37
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Accounting
Page 38
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Accounting
ACCOUNTING APPENDIX B
FINANCIAL STATEMENT ANALYSIS
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Page 39
Children’s Orchard Operations Manual
Accounting
FINANCIAL STATEMENT ANALYSIS
Good, informative financial statements are produced when the source material is
compiled and recorded properly on a timely, accurate basis. "Accurate" means that the
various classifications of income, direct costs and expense are organized by a chart of
accounts proper for the organization. The financial statement is an extension of the
chart - a chart with figures on it.
Financial statements are supposed to tell a story - the story of what happened
financially to the company. The whole story will show what happened this past month
and what has happened to date for the year. The relative percentages of each item to
total sales must also be shown to put the whole story in perspective.
Any time that the analyzer of financial statements finds it necessary to refine
figures on the statements or is forced to go back and plow through journals in order to
break up figures into significant amount, it is time to admit that the financial statements
are not doing a complete job of telling the entire story.
Statement Analysis
The business person has plenty of uses for his/her financial statements if only
taught what to look for. The Balance Sheet and Profit and Expense (Loss) Statements
tell a great deal about a business's health, future, and past.
Proper analysis may show trends which will severely affect the business. When
compared with like businesses or different periods of time for the same business, it may
suggest needed improvements.
Financial statement analysis is a subject, and a career, in itself. It is not within
the scope of this procedure to try to make you an expert in six easy lessons. There are,
however, some specific areas in which you should make yourself reasonably
knowledgeable. These areas include the following:
1.
2.
3.
Current Ratio
Acid Test Ratio
Quick Liquidity Ratio
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Children’s Orchard Operations Manual
4.
5.
6.
7.
8.
9.
10.
Accounting
Inventory Turnover / Inventory Days on Hand
Fixed Debt to Sales
Debt to Equity
Working Capital Factor
Capital Employed Factor
Capital Turnover
Return on Investment
Ratios are used to relate items which vary widely in terms of absolute numbers
but should retain the same balance. If a ratio changes from one month to another, the
question of "why?" needs to be answered.
Current Ratio
The current ratio indicates only the quantity coverage of current assets over
current liability. By itself, it gives no indication of the quality of the assets from which
debt payment is to come. The quality of the trading assets has a most important bearing
on the adequacy of the current ratio. If receivables and inventory are high quality and
liquid, a low current ratio may be acceptable. If these assets are slow and questionable,
the an acceptable current ratio would be correspondingly higher.
Formula:
Current Assets
Current Liabilities
Acid Test Ratio
This is the ratio of cash and net receivables (known as quick assets) to current
liabilities. Marketable securities which are properly classified as current assets should
be included in the computation of the acid test ratio. The acid test is more critical than
the current ratio, since the amount of working capital tied up in inventory is eliminated
from consideration. In the current ratio, there is always the question of the speed of
conversion from inventory to sale. A dollar to dollar ratio of quick assets to current
liabilities is generally satisfactory since each dollar of quick assets enables the payment
of each dollar of current liabilities. It is a good idea to consider the liquidity of the
receivables (total receivables less uncollectible accounts) to qualify the acid test ratio.
Formula:
Cash and Accounts Receivable + Marketable Securities
Current Liabilities
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Accounting
Quick Liquidity Ratio
This ratio compares the most liquid asset—cash—to the most pressing, close-athand liabilities. This comparison allows the analyst to see if immediate collection action
must be taken on receivables to meet current liabilities or if short-term borrowing must
take place.
Formula:
Cash or Equivalent
Current Liabilities
Inventory Turnover
Inventory turnover is a valuable measure of how well a company is managing its
inventory. In a retail business where inventory is the primary earning asset it is
especially critical. A low turnover ratio would indicate that you have very low sales
volume, too much inventory, or poor quality inventory. High turnover may indicate you
have too little investment in inventory and you may be losing sales as customers are
unable to find items to purchase.
Formula:
Cost of Goods Sold
Average Inventory
Cost of Goods Sold is the total amount you paid for the inventory you sold and is found on your
profit and loss statement. It is calculated by taking your beginning inventory, adding your
purchases and subtracting your ending inventory
Average inventory is calculated by adding your inventory at the beginning of the period to the
inventory at the end of the period and dividing by 2.
The result of this formula shows, on average, how many times per year your entire inventory is
sold and replaced.
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Accounting
Inventory Days on Hand
Inventory Days on Hand is an additional way to measure how well you are managing
your inventory.
Formula:
365
Inventory Turnover
The result of this formula tells you how many days of inventory are on hand. In other
words, assuming level sales throughout the year it tells you how many days it would take
to liquidate your inventory.
As with any financial ratios, the trend in inventory turnover over a period of time in your
store should be analyzed. Additionally this number should be compared to other stores
in the same industry.
Fixed Debt to Sales
This ratio is crucial as it represents the ability of the company to justify its
borrowings. Since the debt is fixed, falling sales volumes will make it difficult for the
company to meet its debt retirement requirements. The lower the percentage the better.
Formula:
Debt to Equity
Notes + Loans + Contracts Payable
Net Sales
This ratio represents the company's financial stability. The lower the ratio the
more the financial strength and stability.
Formula:
Total Liabilities
Total Equity
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Accounting
Working Capital Factor
This factor measures the leverages which the company’s financial stability. The
lower the ratio teh
Formula: Current Assets - Current Liabilities = Working Capital
Capital Employed Factor
This factor represents the net investment.
Formula:
Fixed Assets+Other Assets+Working Capital=Capital Employed
Capital Turnover
This ratio represents the number of sales dollars which have been generated by
each net invested dollar (Capital Employed $).
Formula:
Net Sales
Capital Employed
Return on Investment
Profit is significant in itself. Without it, business could not survive for long.
Profit is used to pay ownership for the use of the capital. It is also used to replenish
assets needed to keep the business running. Old equipment must be replaced and
material inventory must be replenished to make additional sales possible. Expansion
must be financed by previously earned profit. Profit, however, does not tell the whole
story. A 6% profit on a million dollars is $60,000. If sales were $10,000, $600 would
still be 6% profit. The pure profit percentage does not measure the potential capability.
If the investment in the physical plant and reserves was $100,000, and was originally
intended to support $400,000 in sales, any performance below $400,000 would mean
that the company was not producing a fair return on investment. Although a profit was
being realized at the desired rate of sales, the volume of profit dollars would not support
the original investment. In time, the facilities and equipment would have to be replaced
or repaired. Would the company be able to dip into its cash reserves (from previous
profits) to finance these replacements, or would additional capital be needed?
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Accounting
The Return on Investment has its significance in the fact that the business must
maintain an adequate sales level along with a predetermined profit rate to support and
protect the principal of the original investment and any addition to it by ownership out
of its own reserves. Profit tells us that we took in more than we spent. The Return on
Investment tells us that the profits realized over a period of time are in such a volume
quantity that the business can support and sustain itself.
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